Strategic Option and Its Implementation for Tesco - Assignment Example

TESCO PLC Table of Contents 0 Introduction This present report focuses on Tesco, which is considered as among the World’s largest food retailer, since it has more than two thousand stores distributed across fourteen different countries. Jack Cohen established it in the year 1919 at East London and so far, it has the largest market share of the UK retail market. Tesco Plc conducts its operation under four different flagships that include Express, Metro, Superstore, and Extra. Apart from being known as a food retailer, the company also deals with a range of products and services that include branded cloths, medicinal products, a range of grocery products, services related to the financial sector, petrol, automobile products, communication equipments, software, internet offerings, insurance services, music downloads, and the leasing and selling of DVDs. It is also beneficial to note that the company sells its own-labeled products that make-up 50% of its total sales (Nash, 2006). This present report will provide a comprehensive insight into the retail giant (Tesco) using three analytical tools or framework that comprise of the PESTEL analytical framework, Porter’s five forces and the SWOT analytical framework. In particular, the report will focus on the evalutaion of the external macro-environment whereby Tesco operates. Secondly, the analysis will cover on the competences as well as the resources of the company and thereby be able to identify the possible threats and opportunities that the company can utilise. Based on the findings of these analyses, the report will recommend on strategic options that the company can apply in order to strengthen its position within the market place. 2.0 Industrial analysis Under this section, the report will identify factors that affect Tesco Plc in the business environment that it operates in, and which have strategic importance. 2.1 PESTEL analysis Porter (1980) stated that for one to get insights about the business environment within which a company does business, it is necessary to perform a PESTEL evaluation that identify how different factors affect or shape-up the aforesaid business. As part of the PESTEL analysis some of the forces that will be analysed in relation to Tesco include political forces, economical forces, socio-cultural forces, technological forces, legal forces, and environmental forces that affect Tesco Plc. In the writings by Krajewski et al. (2009) it was observed that PESTEL evaluation helps in identification of factors that influence the cost, demand, supply, and general financial performance of any business organisation. Force Impact Political In the studies conducted by Yip (2004), he state that political factors included rules and regulations that have been enacted by the executive or relevant government agencies. Secondly, political factor also include the prevailing general political tone, which may be a potential source for business opportunities and/ or threats that affect the enterprises directly or indirectly. Therefore, since Tesco operates in many countries far beyond the borders of the European Union, its business direction, and outcome are possibly affected by the legislative as well as political forces that are prevailing in those countries. Under this force, Tesco is highly affected by employment legislations that require retailers to provide a mix of jobs to everyone, within the society. Tesco complies with this legislation, as its workforce comprise of thd elderly people, disabled people, and students. Economical In reference to the writings by Kaplan and Norton (2008), economical factors are key determinants of the ease at which business organisations such Tesco Plc can record impressive business performance. This is because, economical factors influence the amount of capital available within the market, and they equally influence cost, demand, and prices of goods and services within the market. Thou economic forces cannot be influenced or controlled by Tesco; the diversification in terms of market and offerings mitigate the adverse effect of negative market forces. However, in reference to the company’s past financial performance it is correct to assert that the economic forces have been in favour of Tesco because it recorded an increase in net income to GBP 2.806 billion. Socio-Cultural According to the studies conducted by Walters and Rainbird (2007) it is observed that the current consumer taste is mainly influenced by socio-cultural factors. For example, in the UK, it is observed that consumers prefer ‘one stop’ shopping or bulk shopping, and this trend has encouraged Tesco to stock more of non-food items. Socio-cultural forces have also influenced Tesco to stock more of organic foodstuff because customers are increasingly taking a keen interest on healthy diets. Thirdly, social changes have influenced Tesco to stock more of added value foodstuffs because people are increasingly preferring read-to-eat meals as opposed to home cooked meals. Technological Acur and Bititci (2004) noted that so far, businesses have used technology in order to gain a further competitive advantage within the market place; therefore, technological forces have a huge influence on the performance of businesses. Humby et al. (2006) noted that Tesco has utilised various technologies in order to make the shopping experience more convenient and personalized for their customers. Among the technologies that Tesco has adopted include; the radio frequency identification (RFID), intelligence scale, point of sale systems that allow customers to pay electronically, self check-out gadget, wireless connection within the premises, and electronic labeling of shelves. Environmental Over the past few years, there has been an increased attention on environmental issues particularly advocating for environmental conservation. This trend has resulted in various governments revising their environmental laws, which have affected the business of retailers such as Tesco. One of the key environmental forces that negatively affected Tesco is the ‘fat’ tax, which was directed towards advertisements of fatty and highly processed foods. This tax affected a range of products stocked by Tesco, and subsequently, resulted into bad relationship between the company and some of its suppliers and customers. Legal Tesco is prone to influence by various government legislations as well as policies. For example, the company was affected by the code of practice which was implemented by the Food Retailing Commission that banned on adjusting prices without any consultations and demanding suppliers to make some payments before they can be given tenders. 2.2 Porter’s five forces Force Impact Threat of new entrants Three key players that include Tesco, Sainsbury, and Asda dominate the retail sector in the UK. However, other key players that include Waitrose and Co-operative Food, among others also command a considerable size of the market share. Big retailers such as Tesco have made massive investments with branch network that covers most part of the country thereby making it hard for new retailers who would wish to enter the highly capitalised and competitive sector (MacLaurin, 1999). Therefore, Tesco’s business is not threatened by the possibly of new entrants. This is because new retailers will require excessive capital outlay to outshine the big retailers. Bargaining power of suppliers In the UK’s retail sector, the power of suppliers is not strong since major retailers such as Tesco, Asda, and Sainsbury can influence or tame this power since they can deny suppliers their business. Trent (2007) stated that consequently, large retailers have an upper hand in the negotiations with suppliers. Moreover, the power of suppliers is limited because large retailers like Tesco can source for cheaper raw materials from abroad. Bargaining power of customers Writings by Porter (1980) indicated that as more and more products and services in the market become undifferentiated or standardised then the lower the cost of switching between two related products and services. Consequently, this gives a lot of power to the buyer. However, Tesco has been able to control the power of buyers through its loyalty card (Club card) that is highly effective in customer retention (Simms, 2007). Additionally, offering a wide array of products and services has also helped Tesco to influence the powers that the buyers might have. Threat of substitutes According to the writings by Porter (1980), the possibility of general substitution can lead to a decrease in the demand of a particular product since switching to a related product is easy. The threat of substitutes is imminent for Tesco, because there are numerous small-scale retailers that enable buyers to switch easily. However, Tesco is dealing with this threat by acquiring other small stores and opening up their Express and Metro stores in small towns to curtail the threat of substitutes. Bargaining power of competitors The retail sector in the UK has witnessed highly charged competition in the recent past with each retail store formulating on new business strategies to outshine each other. So far, Tesco has been able to wade off the competition from other retailers such as Asda and Sainsbury by concentrating on customer satisfaction. Tesco remains ahead of the competition by gathering consumer information and then implementing business solutions or strategies that further enable the company to meet customers’ demands. 2.3 SWOT analysis According to Kaplan and Norton (2008), the SWOT analytical framework provides a platform through which the resources, competencies, capabilities, as well as threats to a business organisation can be established. Summarily, Bernard (1981) noted that the SWOT analytical framework enables the identification of external and internal factors that can affect the business outcome and directions of business enterprises such as Tesco Plc. Impact Strength In their studies, Walters and Rainbird (2007) described strengths important variables within a business organisation that enables it to have an edge over other competitors within the market place. One of the main strengths of Tesco is the wide market presence, which enables it to command nearly 30% of the UK market whilst maintaining presence in fourteen different countries. Secondly, Tesco has diversified businesses sectors some of which are unrelated to the grocery or supermarket business and this diversification cushions Tesco from pitfalls within the retail sector and guarantees the company a steady flow of income. Thirdly, Tesco presences in the online platform boost its business performance, as its stores remain open literally for 24 hours. Weaknesses Tesco key weakness is relying too much on the UK market where it controls 30% of the market. This poses a danger to the entire business of Tesco because poor economic performance in the UK can have resounding impact on its entire operations. Opportunities Tesco opportunities lie in improving its non-food sector. These sector comprises of the financial, telecoms, and health and skin care sectors. By further improving these sectors, the company can increase its market share as well as overall profitability. Secondly, Tesco has an opportunity to expand further to other markets, which are still unsaturated and this will improve its market share as well as overall profitability. Threats One threat to Tesco business is the price wars that are currently prevailing in the UK market, whereby retailers are continually reducing their prices in order to wade of competitors. The second key threat for Tesco is the potential of Asda, which by relying on the massive capital as well as management expertise of its parent company, Wal-Mart it can easily outshine Tesco in its key market, which is the UK. 3.0 Tesco Plc strategic options In respect to the threats and opportunities identified above and the findings of the industrial analysis that was conducted; Tesco Plc will have to implement either of the following strategic options in order to maintains its leading position within the UK market and further increase its market share internationally. The strategic options are adopted from the Ansoff matrix, which is illustrated in the image below. Image of the Ansoff matrix Source: /www.tutor2u.net/business/images/Ansoff Matrix According to the studies conducted by Ansoff (1957) the strategic options comprise of ; a) Market penetration b) Market development c) Product development d) Diversification 3.1 Product development Under the option of developing the existing product and services, Tesco Plc will have to enhance its products and services so that they can further meet customers’ needs and expectations. However, as earlier noted Tesco Plc already applies this strategy because it usually performs consumer survey and then use the information collected to develop and enhance some of the services that it offers. Moreover, been a retailer it cannot participate in product development since this done by the suppliers or manufacturers. 3.2 Market penetration Market penetration involves venturing into potential markets that are unsaturated and of which Tesco Plc had not yet exploited. Tesco Plc can penetrate deep into the market by buying out retail stores in other countries, which already have a wide branch network or they can solely venture into a new market on their own. In addition, Tesco Plc can penetrate the market by forming strategic alliance with other companies that specilises in software development, financial services, telecommunications, and internet services. Through the strategic alliances, Tesco can acquire expertise in running these divisions that are not its key business focus or specialty. Lastly, the company can penetrate easily into the new markets by revamping its online platform to serve locations where it does not have physical stores. This will involve aggressive marketing for tesco.com and setting up of a bigger logistics department to foresee the shipping or transportation of items purchased through the online platform by customers who are not near the physical stores. 3.3 Product differentiation Under this strategic option, Tesco Plc will be required to increase further the number of its own branded products. Currently, half of the total sales of Tesco Plc are products that the company has personally branded thereby increasing these numbers will deny customers a variety of brands to choose, which is not a wise business strategy. De Toni and Tonchia (2003) supported this argument by stating that strategic retailers stock a variety of brands in order to satisfy a wide variety of customers thereby keeping up with the slogan of ‘one stop’ shopping. 3.4 Market development Under this strategic option, Tesco Plc will be required to enforce promotional strategies that will increase customer satisfaction and service delivery and additionally, this option will seek to nurture customer loyalty on Tesco’s services and products. In this regard, it is important to mention that Tesco Plc already applies this strategy because it offers to customers a loyalty card (Club card), which has so far proven to be successful in customer retention. Secondly, the company also offers numerous discounted services and products in a bid to retain the already customer base and even lure in new customers. 4.0 Strategic option and its implementation First, the study will seek to test the viability of each strategic choice that was previously mentioned in the above section. The evaluation shall be carried out using a benefit ranking system, which is presented in appendix 1. Under the benefit ranking system, variables that will be used to test the viability of each strategic choice will be applied across all the four available choices to ensure that there is no biasness on the evaluation process. It is important to note that each variable will be graded using a scale system of 1 to 5. From the evaluation system shown in appendix 1, the summary of the result are as follows; market penetration scored the highest aggregate score of 30, market development scored a total of 25, product differentiation and product development tied at the last position with both having an aggregate score of 19. Conclusively, from the viability test carried out, it is market penetration, which emerged as the best strategic choice that Tesco Plc. Tesco Plc can therefore apply this strategic choice to improve its current position within the market and boost its financial performance. Among the advantages of market penetration as a strategic option is that Tesco Plc will be able to increase its market share and diversify its markets, this will also act as a buffer for the company incase its main market, which is the UK is affected with harsh economic conditions. The increase in branch network because of deeper market penetration will also bring along advantages attributed to economies of scale more so in terms of marketing expense (Brown et al. 2011). It is important to note that prior market surveys will be carried out to establish potential markets where Tesco Plc can venture. However, Tesco Plc might be faced with certain challenges during the implementation of this strategic option and one of the challenges include unfamiliar and maybe harsh political factors in the new market 5.0 Conclusion It is no doubt that currently Tesco is successful through its business strategies and this was confirmed by the fact that most of the strategic options that was suggested, the company had already implemented them. The company currently faces threats brought about by price wars amongst retailers and the threat from other retailers such as Asda, which is owned by the largest retailer in the world that is Wal-Mart. However, with further market penetration, the company will be able to offer goods and services at much lower prices than their competitors because of economies of scale and thereby eradicate the threat caused by prices wars. Secondly, through market penetration, Tesco will be able to increase its market share, which will in turn make it hard for other new retailers to enter into the market and it will have an equal financial muscle as Wal-Mart, which is the parent company of Asda, its main rival in the UK. References Acur N. and Bititci U. (2004) A balanced approach to strategy process, International Journal of Operations & Production Management, Vol. 24 issue 4, pp.388-408; Ansoff, I. (1957). Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5, pp. 113-124 Bernard, B., (1981), Feasibility study of a new business, N Y, Sage Publishers Brown, S. Bessant, J. and Lamming, R. (2011). Strategic Operations Management. London; Routledge De Toni A. and Tonchia S. (2003). Strategic planning and firms competencies: Traditional approaches and new perspectives. International Journal of Operations & Production Management, Vol. 23 Issue 9, pp.947-976 Humby, C. Hunt, T. and Phillips, T. (2006). Scoring points: How Tesco continues to win customer loyalty. London & Philadelphia: Kogan Page Kaplan, R. and Norton, D. (2008). The Execution Premium: Linking Strategy to Operations for Competitive Advantage. Boston, MA. Harvard Business School Press Krajewski, L. Ritzman, L. and Malhotra, M. (2009). Operations Management (9th Edition). New Jersey; Prentice Hall MacLaurin, I. (1999). Tiger by the Tail: A Life in Business from Tesco to Test Cricket. London: Pan Books. Nash, B. (2006). Fair-Trade and the growth of ethical consumerism within the mainstream: an investigation into the Tesco consumer. Leeds: University of Leeds Porter M. (1980) How Competitive Forces Shape Strategy, The McKinsey Quarterly, pp.34-50; Simms, A. (2007). Tescopoly: How one shop came out on top and why it matters. London: Constable Trent, R. (2007). Strategic Supply Management: Creating the Next Source of Competitive Advantage. Pine Island Rd; J. Ross Publishing Walters, D. and Rainbird, M. (2007). Strategic Operations Management: A Value Chain Approach. Hampshire, U.S, Palgrave Macmillan Yip G. (2004) Using Strategy in Change Your Business Model, Business Strategy Review, summer, 15 (12), pp. 17-24 Appendix 1 The benefit ranking system Evaluation of the strategic option of product differentiation Benefit Ranking 1-very low; 2-low; 3-medium; 4-high; 5-excellent Factors that will be used for evaluation Product differentiation Has the alternative reduced the threats posed by new entrants into the market? High Does the alternative have any potential of increasing the firms overall profitability? Medium Has the alternative offered an opportunity for increasing customer satisfaction? Low Has the alternative enhanced the already developed reputation and established firm image? High Has the alternative exploited the identified opportunities for the company? Very low Has the alternative offered the firm any guarantee for the long-term survival and success? Medium Can the success of the alternative survive market fluctuations or sensitive to timing? Low AGGREGATE SCORE 19 Evaluation of the strategic option of market penetration Benefit Ranking 1-very low; 2-low; 3-medium; 4-high; 5-excellent Factors that will be used for evaluation Market penetration Has the alternative reduced the threats posed by new entrants into the market? Excellent Does the alternative have any potential of increasing the firms overall profitability? Excellent Has the alternative offered an opportunity for increasing customer satisfaction? Low Has the alternative enhanced the already developed reputation and established firm image? High Has the alternative exploited the identified opportunities for the company? Excellent Has the alternative offered the firm any guarantee for the long-term survival and success? Excellent Can the success of the alternative survive market fluctuations or sensitive to timing? High AGGREGATE SCORE 30 Evaluation of the strategic option of market development Benefit Ranking 1-very low; 2-low; 3-medium; 4-high; 5-excellent Factors that will be used for evaluation Market development Has the alternative reduced the threats posed by new entrants into the market? Excellent Does the alternative have any potential of increasing the firms overall profitability? High Has the alternative offered an opportunity for increasing customer satisfaction? Excellent Has the alternative enhanced the already developed reputation and established firm image? Excellent Has the alternative exploited the identified opportunities for the company? Very low Has the alternative offered the firm any guarantee for the long-term survival and success? Medium Can the success of the alternative survive market fluctuations or sensitive to timing? Low AGGREGATE SCORE 25 Evaluation of the strategic option of product development Benefit Ranking 1-very low; 2-low; 3-medium; 4-high; 5-excellent Factors that will be used for evaluation Product development Has the alternative reduced the threats posed by new entrants into the market? Very low Does the alternative have any potential of increasing the firms overall profitability? Low Has the alternative offered an opportunity for increasing customer satisfaction? Excellent Can the alternative enhanced the already developed reputation and established firm image? Excellent Has the alternative exploited the identified opportunities for the company? Very low Has the alternative offered the firm any guarantee for the long-term survival and success? Very low Can the success of the alternative survive market fluctuations or sensitive to timing? High AGGREGATE SCORE 19 Read More